U.S. agency sees steep fall in oil prices as temporary

The sharp drop in U.S. crude oil prices since the beginning of the year will be temporary as OPEC production cuts offset slower oil demand growth, the U.S. government's top energy forecasting agency said Tuesday.

With mild winter weather reducing demand for heating fuels, U.S. crude oil prices slid to an 18-month low below $54 a barrel Tuesday. Oil futures ended the trading session at $55.64 a barrel, down 45 cents, the lowest close since June 2005.

But the federal Energy Information Administration said the price drop -- about 9% since the start of the year -- probably would be short-lived.

In its latest monthly forecast released Tuesday, the Energy Department's analytical arm said it expected the U.S. average oil price to rise to $62 a barrel in the current quarter and then jump close to $66 in the second quarter when gasoline demand picks up, before falling to $65 a barrel in the third and fourth quarters.

"If OPEC continues to alter production to keep inventories near normal levels, the price for [West Texas Intermediate oil] is expected to average between $64 and $65 per barrel in 2007, although prices will likely fluctuate throughout the year," the agency said.

For consumers, mild weather and lower energy prices are expected to lower this winter's average household heating fuel expenditures to $873, compared with $948 last winter, the agency said. This would be the first winter since 2001-02 that heating fuel costs declined from the prior winter.

Oil demand in the next two quarters will be higher than a year ago, but not as strong as the agency had expected.

The agency revised down its U.S. oil demand growth estimate by 130,000 barrels a day with consumption at 20.8 million barrels a day for the current quarter and by 110,000 barrels a day with oil use at 20.7 million barrels a day for the second quarter.

For the world, the agency sees oil demand growth lower by 300,000 barrels a day in the January-to-March period and 200,000 barrels a day fewer in the April-to-June period.

The Organization of the Petroleum Exporting Countries, concerned by a slide in prices from July's record $78.40 a barrel, agreed to cut its oil output by 1.2 million barrels a day starting in November and an additional 500,000 barrels a day in February.

The cartel is in talks about what to do next to stop the drop in oil prices, the group's president said Tuesday.